How to Borrow Money and How to Repay Borrowing and How to Avoid Borrowing

In the United Kingdom the Bank of England base rate is a mere half of one per cent, the lowest it has been in modern economic times. If you deposit money with a large bank or institution you will get a rate of interest tied to that half per cent; it may be a few points higher or a few points lower, depending on how long you are prepared to trust the bank with your money. In any event it will not produce a real return or even keep up with inflation, which is running comfortably more than 2.5% a year.

Borrowing, of course, is a different story. Unless you are considered to be an absolutely safe borrower (someone who does not need to borrow money) you will pay considerably more than two or three basis points above the bank rate. Credit cards charge nearly twenty per cent above the bank rate and store cards charge even more. Many bank overdrafts come in disguised forms so that when you take into account arrangement fees and the like you will pay far more interest than you might have thought at first sight.

Today the European Central Bank, which runs the euro, is expected to announce a drop in its base rate from three quarters of one per cent to half of one per cent. This will apparently stimulate growth. However interest rate manipulation by central banks is a weapon which has a poor aim. The present ECB base rate of ¾% has not helped the struggling economies of Greece, Portugal Spain and Italy to improve their economies by growth, any more than the ½% has helped growth in the United Kingdom. For most businesses who have borrowed at rates linked to base rate low base rates operate as a mere stay of execution, rather than as a reprieve.

Businesses who want to borrow new money that are small and medium sized businesses find that the real rates of interest that they are offered are very high, if they can secure loans at all.

If you have a business that needs to grow and you need money for this purpose it will be wiser to see if you can raise capital, rather than raise a loan. People may be interested in making a small investment that produces a better rate of return, perhaps by way of preference shares or some other kind of equity, rather than holding deposits in the bank that produces a negative return in real terms.

The problem with small businesses raising capital is that it can be expensive; legal documents need to be drawn up, and the cost may be disproportionate for very small enterprises.

The more successful economies in the world today have businesses which are founded on capital, rather than on borrowing. If you want to grow your long term benefits are greater and the short term burden is lesser if you raise capital or even if you save, instead of borrowing.

One way of looking at the issue of borrowing is to think of money as no more than a commodity that has a maintenance cost attached to it. You can buy the commodity in dozens of different shops. It makes sense to find the shop that has the cheapest cost attached to it. When it comes to repaying loans, keep the commodity idea in mind and pay off the commodity that costs the most to maintain.

Filed under: climate change Tagged: banks, base rate, borrowing, business, ECB, economy, euro, interest rate manipulation, lending, medium sized businesses, money, rate credit cards